Flipkart takes the road less travelled, draws up plans to boost growth in tier-II cities

The move to expand its logistics footprint comes at a time when Flipkart has started seeing growth in gross sales, which remained flat for most of 2015 and 2016.Payal Ganguly | ET Bureau | March 15, 2017, 08:25 IST

Flipkart is devising an aggressive plan to boost growth in smaller towns and cities and will expand its logistics network in the hinterland as it seeks to entrench its position as India's largest online retailer.

In the second half of 2016, the Bengaluru-based company registered a sharp spike in new business from tier-II cities and beyond -which now account for nearly two thirds of total sales -requiring a wider network of delivery hubs to service growing orders.

“In the next six months (we) will set up 100 (new) delivery hubs,“ said Nitin Seth, chief operating officer at Flipkart who estimates that 65% of new customers who shopped on the platform, after the end of its mega annual sale in October, are from non-metro areas.

“Ecommerce is no more a large-city phenomenon, our strategy is very focused on middle India,“ said Seth, adding that the expansion of the logistics arm, Ekart, in these areas will mark a “significant investment“ by the company. Ekart currently has 450 delivery hubs.Flipkart had said in September 2016 that its customer base had crossed 100 million, while India's overall internet user base stands at over 400 million with large number of new users coming from rural areas, according to industry body IAMAI.

Ekart which also works with external clients for fulfilment of their orders by providing warehouse space (as part of Fulfilled by Ekart) and last-mile delivery had closed its online courier and food delivery business earlier this year due to unvia bility of the business models. Experts are of the view that growing the business in smaller cities and building its own logistics network will help the etailer cut costs. “One of the thought process in establishing Ekart was to help reduce cost of delivery in metro cities. They can do the same for smaller cities and ask third-party logistics players to match them, thereby reducing costs,“ said one industry analyst.

The move to expand its logistics footprint comes at a time when Flipkart has started seeing growth in gross sales, which remained flat for most of 2015 and 2016. Flipkart hasn't been able to cross the $5-billion mark in gross merchandise value after surging from a $1-billion annual run rate in 2013-14 to $4 billion in 2014-15. The company has said that the growth momentum has come back since October 2016 and in an earlier interview, the company had said that it is targeting a 40% year-on-year growth in March.

Apart from growing its reach, Flipkart is also growing its selection in the top-selling categories in the non-metro cities which include fashion and lifestyle, mobiles, and large appliances. “Lifestyle, large appliances, (and) furniture will drive the growth. The growth, overall, for the company, and that is aligned with the strategy,“ added Seth.

Flipkart claimed a 65% market share online for the sale of mobiles in January-February 2017. The Flipkart group, which includes Myntra and Jabong, commands a market share of over 75% in the fashion and lifestyle category in e-commerce.

For large appliances, Flipkart has been building a strong supply chain over last year apart from specialised unit within its logistics chain to handle the growth category.

Tiger Global-backed Flipkart saw a large churn in 2016, bringing back Kalyan Krishnamurthy to re-haul the company and finally took over as CEO in January 2017. This has seen revival of top-selling categories on Flipkart and deprioritising subcategories which do not work well on the platform to reduce burns.

Laying down a clear path to profitability will be crucial for the upcoming round of funding for Flipkart as investors look at a last lease for their portfolio companies, said the expert cited above.